Gunes Kamber

ESTIMATED SMALL OPEN ECONOMY MODEL WITH FRICTIONAL UNEMPLOYMENT

This paper investigates labour market dynamics in New Zealand by estimating a structural small open economy model enriched with standard search and matching frictions in the labour market. We show that the model fits the business cycle features of key macroeconomic variables reasonably well and provides an appealing monetary transmission mechanism. We then extend our analysis to examine the driving forces behind labour market variables. Our findings suggest that the bulk of variation in labour market variables is solely explained by disturbances pertaining to the labour market.

Financial exposure and the international transmission of financial shocks

This paper analyzes the transmission mechanism of banking sector shocks in an international real business cycle model with heterogeneous bank sizes. We examine to what extent the financial exposure of the banking sector affects the transmission of foreign banking sector shocks. In our model, the more exposed domestic banks are to the foreign economy via lending to foreign firms, the greater are the spillovers from foreign financial shocks to the home economy. The model highlights the role of openness to trade and the dynamics of the terms of trade in the international transmission mechanism of banking sector shocks Spillovers from foreign banking sector shocks are greater the more open the home economy is to trade and the less the terms of trade respond to foreign shocks.

Financial Frictions and the Role of Investment Specific Technology Shocks in the Business Cycle

Various papers have identified shocks to investment as major drivers of output, investment, hours, and interest rates. These investment shocks have been linked to financial frictions because financial markets are instrumental in transforming consumption goods into installed capital. However, the importance of investment shocks is not robust once we explicitly account for a simple financial friction. We estimate a medium scale dynamic stochastic general equilibrium model with collateral constraints. When entrepreneurs are subject to binding collateral constraints, a reduction in the value of installed capital reduces the value of collateral and thus the amount an entrepreneur can borrow. As a result, aggregate consumption no longer co-moves with GDP and the response of investment to a positive investment shock is attenuated. In the model with collateral constraints, the role of risk premium shocks in the business cycle increases markedly, whereas investment shocks have a much diminished role.

Financial Intermediation and the International Business Cycle: The Case of Small Countries with Big Banks

We examine the transmission mechanism of banking sector shocks in a two-country DSGE model. Assuming that the home country is small relative to the rest of world, we find that spillovers from foreign banking sector shocks are modest unless banks in the small country hold foreign banking assets. The correlation between home and foreign GDP rises with the exposure of the domestic banking sector to foreign bank assets.

The Financial Accelerator and Monetary Policy Rules

The ability of financial frictions to amplify the output response of monetary policy, as in the financial accelerator model of Bernanke et al. (1999), is analyzed for a wider class of policy rules where the policy interest rate responds to both inflation and the output gap. When policy makers respond to the output gap as well as inflation, the standard financial accelerator model reacts less to an interest rate shock than does a comparable model without an operational financial accelerator mechanism. In recessions, when firm-specific volatility rises, financial acceleration due to financial frictions is further reduced, even under pure inflation targeting.

International Spill-Overs of Uncertainty Shocks: Evidence from a FAVAR

This paper analyses the international spill-overs of uncertainty shocks originating in the US. We estimate an open economy, structural factor-augmented vector autoregression (FAVAR) model that identifies US uncertainty shocks and estimates the impact of these uncertainty shocks on the US economy, major world economies and a small open economy, namely New Zealand. The data-rich nature of our model allows us to investigate different transmission channels from the US to the rest of the world. We find the confidence channels, measured by the expectations surveys, are particularly important in the transmission of the uncertainty shock to a small open economy.

A NOTE ON THE BUSINESS CYCLE IMPLICATIONS OF TRADE IN INTERMEDIATE GOODS

Trade in intermediate goods is an important feature of trade in developed small open economies. We show that a model that assumes trade in intermediate goods brings the dynamics of an otherwise standard small open economy closer to what is observed in the data. With trade in intermediate goods, movements of international relative prices affect the economy through an additional channel, denoted the “cost channel.†A model embedding this channel comes closer to business cycle data in several dimensions compared to models with trade in final goods only. It increases the share of output variance explained by foreign shocks, lowers the exchange rate pass-through, and delivers a positive international correlation of outputs. In addition, the matching of other business cycle moments is at least as good as in a model with trade in final goods only.